By Moaaz Manzoor

Lingering tensions in the Gulf may push up inflation in Pakistan by driving up fuel costs, freight charges and war-risk insurance premiums, adding pressure on the country’s import bill and external accounts.

The inflation risk is no longer tied only to movements in benchmark crude prices. As uncertainty persists around the Strait of Hormuz, Pakistan faces higher landed energy costs because imported oil and LNG pass through shipping routes that remain vulnerable to disruption. Any sustained rise in fuel and transport costs typically feeds quickly into freight, food and other consumer prices.

A policy note by the Sustainable Development Policy Institute’s Policy Solutions Lab, titled US-Israel War on Iran: Impact on Pakistan’s Economy, says the scale of the impact will depend on both the size and duration of the shock. According to the note, annual average inflation could reach 11-13%, nearly double the State Bank of Pakistan’s 5-7% target, once the effects of a higher import bill, rupee depreciation and a possible reduction in GCC remittances are factored in.

The note estimates that the oil import bill could rise by about $6.2 billion under a phased scenario. It also warns that GDP growth may slow to 3.01-3.33%, and fall below 3% if energy shortages persist and gas rationing to industry deepens. Empirical evidence for Pakistan suggests that a 10% increase in oil prices raises headline inflation by around 0.2 to 0.4 percentage points.

The broader external vulnerability is also highlighted in the Pakistan Banks Association’s March 2026 industry note, Macroeconomic and Banking Sector Implications of the Iran-GCC Conflict for Pakistan. It says Pakistan’s exposure stems from higher energy import costs, pressure on the external balance and inflationary spillovers. Petroleum imports account for nearly one-fifth of the total import bill, while sustained increases in global oil prices could raise the annual petroleum import bill by between $1.4 billion and $4.7 billion.

Speaking with Wealth Pakistan, Dr Abid Qaiyum Suleri, Executive Director of the Sustainable Development Policy Institute, said the risk extends beyond oil prices. “The threat is serious because the war is not only an oil shock but also a freight, insurance and logistics shock,” he said.

He noted that Gulf war-risk premiums have surged sharply in some cases, while shipping disruptions and emergency fuel surcharges are raising Pakistan’s landed import costs beyond energy alone. “Oil and supply shocks are a major source of inflation persistence,” he added.

Suleri said the pressure comes at a delicate time for the economy. Pakistan’s goods imports stood at $41.8 billion and the current-account deficit at $0.7 billion during Jul-Feb FY26. Even a modest rise in freight and fuel costs can therefore worsen the external balance.

With the transport sector consuming about 80% of petroleum-product demand in Jul-Mar FY25, he said higher diesel and petrol prices tend to pass quickly into freight, food and broader consumer prices.

Offering a strategic perspective, Dr Masood Khattak, Assistant Professor at the International Islamic University, said Pakistan’s exposure is closely tied to the Strait of Hormuz, through which roughly one-fifth of global oil supply passes. He noted that even partial disruption can push up tanker charges and shipping costs, making imported fuel more expensive for countries dependent on Gulf supplies.

The Pakistan Banks Association note also highlights spillover risks to the financial system. It estimates the banking sector’s outstanding trade finance exposure at $9-22 billion at any point, meaning disruptions to shipping routes, commodity prices and foreign-exchange markets can affect financing activity and liquidity conditions.

It also notes that more than 53% of Pakistan’s remittances during July-January FY26 originated from GCC countries, underlining how prolonged regional instability could add pressure on external inflows.

Financial markets are already pricing in these risks. Ali Najib, Deputy Head of Trading at Arif Habib Limited, said the Pakistan Stock Exchange recorded a sharp decline, with the KSE-100 Index falling by 5,406 points, or 3.41%, to close at 152,910, as investor sentiment weakened amid regional tensions.

Najib said a sustained rise in energy prices could widen the current account deficit and revive inflationary pressures. He stressed the need for prudent energy hedging, adequate foreign-exchange buffers, rationalised imports and structural reforms to support exports and productivity.

For Pakistan, the broader lesson is that Gulf tensions are not just a foreign policy concern but a direct economic risk. As long as shipping and insurance costs remain elevated, inflationary pressures may continue to build even without a complete disruption in energy supplies.

Credit: INP-WealthPk